Wednesday, November 07, 2007

It's certainly understandable that in a time of $100 a barrel oil many laud the promise of biofuels. Yet, Ricardo Hausmann, an economist at Harvard's Kennedy School of Government is guilty of overstating the case for them. For instance, he boldly claims the following:

Peering into the future seldom produces a clear picture. But this is not the case with bio-energy. Its long-term impacts on the global economy appear to be pretty clear, making many long-term predictions quite compelling, including the demise of the price-setting power of the Organisation of the Petroleum Exporting Countries and the end of agricultural protectionism.

While no one can deny that biofuels will be part of tomorrow's energy mix, that's a stretch. Let's begin with the following claim:

Second, the world is full of under-utilised land that can grow the biomass that the new technology will require. According to the Food and Agriculture Organisation, the world has a bit less than 1.4bn hectares under cultivation. But using the Geographic Information System database, Rodrigo Wagner and I have estimated that there are some 95 countries that have more than 700m hectares of good quality land that is not being cultivated. Depending on assumptions about productivity per hectare, today’s oil production represents the equivalent of some 500m to 1bn hectares of biofuels. So the production potential of biofuels is in the same ball park as oil production today

It is very unseemly for an economist to claim that there's a free lunch to be had. After all, why is all that land being underutilized? Maybe there are good reasons for that! It's not as if there's a shortage of land hunger in those countries. Also, let's not forget the inconvenient truth that some of that land is bound to be forested and turning into cropland is, shall we say, not an attractive proposition given our climate change worries.

Let's check out another of his claims:

Fifth, the increase in the price of agricultural land and of food will relieve governments from the current political pressure to protect the agricultural sector. Governments that, as a consequence of the land glut, have been protecting and subsidising farmers will see them grow rich either because they “plant” biofuels themselves or because other producers switch into them, lowering the supply and increasing the price of other crops.

The man clearly underestimates the power of the agricultural lobby. Even at today's high prices, farmers and big agro firms are set to push through a massive farm bill that leaves subsidies intact.

And last but not least, Hausmann dismisses the impact of higher food prices by saying that will create pressures to liberalize agricultural trade. Maybe. But it's not at all clear that liberalization would lead to lower prices, specially if, as he argues, subsidies are reduced. Let's not forget that even if a biofuel boom leads to higher rural incomes overall, some groups will be net losers due to high food prices, like landless agricultural workers.

Why come down so hard on Hausemann? I'm not against biofuels. But overselling their promise will lead to unnecessary policy mistakes, with long-term negative consequences. Yes, it's certainly worthwhile to promote R&D in this area, but subsidies, mandates and tariffs should not be used to promote their use.